Cost curve

In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible level of production, and the result is a cost curve. Profit-maximizing firms use cost curves to decide output quantities. There are various types of cost curves, all related to each other, including total and average cost curves; marginal ("for each additional unit") cost curves, which are equal to the differential of the total cost curves; and variable cost curves. Some are applicable to the short run, others to the long run. There are standard acronyms for each cost concept, expressed in terms of the following descriptors: SR = short run (costs spent on non-reusable materials e.g raw materials) LR = long-run (cost spent on renewable materials e.g equipment) A = average (per unit of output) M = marginal (for an additional unit of output) F = fixed (unadjustable) V = variable (adjustable) T = total (fixed plus variable) C = cost These can be combined in various ways to express different cost concepts (with SR and LR often omitted when the context is clear): one from the first group (SR or LR); none or one from the second group (A, M, or none (meaning “level”); none or one from the third group (F, V, or T); and the fourth item (C). From the various combinations we have the following short-run cost curves: Short-run average fixed cost (SRAFC) Short-run average total cost (SRAC or SRATC) Short-run average variable cost (AVC or SRAVC) Short-run marginal cost (SRMC) Short-run fixed cost (FC or SRFC) Short-run total cost (SRTC) Short-run variable cost (VC or SRVC) and the following long-run cost curves: Long-run average total cost (LRAC or LRATC) Long-run marginal cost (LRMC) Long-run total cost (LRTC) The short-run total cost (SRTC) and long-run total cost (LRTC) curves are increasing in the quantity of output produced because producing more output requires more labor usage in both the short and long runs, and because in the long run producing more output involves using more of the physical capital input; and using more of either input involves incurring more input costs.